How to Tackle Unexpected Price Increases from Your Chinese Supplier
Product sourcing or procurement is the backbone of a successful Amazon business. Your sale price, ROI, profit margin – almost everything depends on the cost and quality of your sourced product. This is why maintaining a balance for both is crucial.
You’ve worked to the bone finding a good supplier and finally sourced a good product that’s selling well in the market. But then, one day, just before you’re about to place your next order, you receive a message. It’s your supplier, they’ve increased their prices.
Terrifying, right? Unfortunately, that’s what we are seeing these days. Most Chinese suppliers have raised their factory rates and as a result Amazon sellers appear to be in a fix.
Price increases from your supplier can really hurt your store’s bottom line, especially if you don’t see it coming. These increases can drive up the sale price, which means you can lose that competitive edge or those shiny margins, at the very least. And, when suddenly, the process of finding and negotiating with a new supplier can leave you struggling with the prospect of going out of stock.
Don’t fret though, we are here to help you. In this guide, we’ll cover some of the reasons for the recent (and potential) price hikes and what you can do to counter this issue.
Why the Price Increase
You may be thinking, “My supplier and I were on great terms, then why this sudden increase?”.
Well, it’s not you or the supplier; it’s the situation. Here are a few reasons why your supplier decided to take this plunge.
Problems arising due to COVID
Probably the most apparent reason for the price hike. The coronavirus pandemic has changed the course of the world, including procurement. Supply chains have been disturbed massively, labor is becoming hard to find, and lockdowns and trade restrictions are in full flow. This means that suppliers can’t carry out production effectively and efficiently.
The value of the YUAN is increasing
Over the last years, the Chinese Yuan or Renminbi has been steadily appreciating against the US dollar. But why would that make a difference?
Instead of having a floating rate like most economies, China pegs its currency to the US dollar and allows fluctuation within a steady band (set at 1%). Since its reevaluation in 2005, the Ren/Yuan has shot up to 60% and doesn’t look like stopping anytime soon. A stronger Yuan means a stronger exchange rate, which then reduces margins for those who export. This, in turn, increases the price of your product.
Backlog of orders
With the recent pandemic and trade situation, Chinese suppliers are having a huge backlog of orders that need clearing. However, they still have the same resources as before (or in some cases even fewer). Plus, new orders just keep rolling in.
In short, the demand is high and suppliers just can’t cope. Therefore, they are being left with no choice but to mitigate the issue by bumping up their prices.
That said, not all suppliers are genuine with their reason for the rate increase. Some Chinese suppliers may cite factory upgrades as reasons for the increment, which can sometimes be a move to take advantage of the buyers’ plights rather than anything else. More on this later.
So how do you tackle these sudden (and uncalled) price increases?
What to Do if Your Chinese Supplier Starts Quoting You Higher
Here are a few things you can do to manage the situation:
If the reason is an increase in labor costs
Unfortunately, you can’t do much in this case and have to take the hit. But if a supplier keeps increasing prices repeatedly because of labor costs, then you might want to explore other suppliers who rely more on machinery and automated processes and less on manual labor.
The move is likely to be a bit more on the expensive side to start with, but it should pay you off in the long run. Take some time to evaluate your options.
If the reason is high raw material costs
We often find that suppliers use such excuses to increase their profit margin. Don’t be gullible. Always be aware of your supply chain.
You can do basic checks on the costs of specific resources and compare your supplier’s prices with where the market seems to be standing. Let your supplier know if things don’t add up. Use that information in your negotiations to dictate the terms.
Unfortunately, though, there is not much free information on the Internet, and you’ve got to pay for most services if you want accurate real-time data. One way is to check your local stock or commodity market and see if you can find anything valuable.
You can also do a quick Google search for ‘raw material prices in China’ or go onto websites like infomine.com and indexmundi.com and research the price index on your product’s material.
If the reason is YUAN appreciating USD
Many manufacturers increase charges once the Yuan appreciates against USD. Make sure that’s true, and your supplier is not taking you for a ride. A quick search on XE.com or Google will help you determine the current situation.
In some instances, it may be valid that RMB appreciates against the Dollar, so pre-agreeing a price well in advance helps mitigate any currency fluctuations. If you haven’t done that, you don’t have many options except, perhaps, asking your supplier for one more order on the last agreed price and assuring them that you will continue to work with them.
If the reason is factory upgrades
As we mentioned earlier, sometimes suppliers raise their prices when upgrading their factories or buying new machinery. If that’s the case indeed, such upgrades may actually bring you benefits in the long run.
Think of it as an investment. You pay a little more right now and get stable prices later on even when the labor cost may increase in the future.
Keep in mind though such upgrades are not always real. So, when they do happen, make sure to evaluate the situation thoroughly and figure out if it’s genuine.
Things You Can Do in Advance to Equip Yourself Better for Potential Price Battles
Always have a backup supplier
Bringing in some competition often helps get the price down. Do some research, ask for quotes, and always have a backup supplier if your existing one doesn’t want to cooperate with you.
If you are negotiating with a factory you have purchased from in the past, and all you tried has been fruitless, mention that you will have to find a new supplier. It usually serves as a wake-up call for the current manufacturer to offer better pricing and understand that you are serious in this game.
One important piece of advice, don’t ever fake it though. Chinese suppliers smell the slightest worry over time and call your bluff, making you possibly lose all current and future negotiations.
With that in mind, make sure you’ve prepared all your engineering designs, specification sheets, and even a few rough samples ready when you hand over the job to a new supplier. This practice will make onboarding easier
Tell your supplier to purchase raw material in advance
Your supplier may increase the rates of your re-order because of increasing material prices. To tackle this in advance, try making your quarterly and annual sales projections and sharing them with your manufacturer. That way, they can purchase the raw materials earlier, and you don’t have to be haggling over the rates in a bull market. This is especially helpful if you sell something in a volatile industry.
In this article, we discussed the major reasons for the price increase, how to tackle these increases, and ways to prepare your business for them beforehand. We hope you found it helpful.
It’s time to get into action, manage the pricing situation, fix your bottom line, and make some healthy profits from your Amazon business
ZonGuru is an all-in-one Amazon toolkit that helps private label sellers with product research, niche evaluation, competition analysis, listing optimization, inventory tracking, customer review acquisition, and running day-to-day operations of their Amazon business. Our tools bring you the most accurate data from across ten Amazon marketplaces, including the US, Canada, Mexico, UK, Italy, France, Spain, Australia, Germany, and India. We make selling on Amazon easier.
About the Author Hammad Nafees
A marketer by trade, a writer at heart, and an Amazon evangelist around-the-clock, Hammad lives and breathes the world of the smiling A. He can often be found discussing the ins and outs of the marketplace across the web. In the very rare instances when he is not busy educating the audiences, he likes to sit down and have a good me-time watching the latest football action on his large-sized TV screen.